Rudi's View | Nov 02 2016
In this week's Weekly Insights:
– How Long The Buyers' Strike?
– Rudi On Tour
– Nothing Ever Changes, Or Does It?
– Rudi On TV
How Long The Buyers' Strike?
By Rudi Filapek-Vandyck, Editor FNArena
"Know what you own, and know why you own it"
One of the funnier videos that caught my social media eye this year is titled "If You Worked Like You Play Golf".
Amateur golfers in particular recognise many of the underlying themes from personal experience. No matter how skilled we are, or how much strategy, training and lessons we bring to the game, on some days n-o-t-h-i-n-g works. Absolutely nothing.
Frustrating as it may be, most golfers take this into their stride and focus on the positives instead, like that one bunker escape on the ninth or that lucky chip out of nowhere. They know these dire days come along, but they shall pass too. Cometh a new day with a new game and things look a helluva lot different.
This year, many an investor in the Australian share market, from professional to inexperienced and all variations in between, has had a fair amount of bad golf days. No doubts about it. Chances are high you are probably going through exactly such frustrating time right now.
The golf enthusiasts among us don't need to be reminded. This too shall pass. Better times shall announce themselves. This is not about us, it's the market right now.
[Those interested in viewing the video can do directly via: https://www.youtube.com/watch?v=YdDr9hqShnM]
One should never underestimate the ability of financial markets to surprise, but oh boy, 2016 has well and truly proven to be one year extraordinaire! More twists and turns than even the worst B-movie script writer in Hollywood could possibly come up with. All in such a short time.
Needless to say, 2016 has been very much a case of you're either "in" with the trend or "out" and if you find you're not in, you really feel like the amateur golf player on a real bad day. N-o-t-h-i-n-g works.
The latest twist is investors only seem to be interested in miners and related stocks, sometimes in energy companies (when OPEC cooperates), maybe a little bit in banks, since they are reporting and offer dividends, but otherwise in little else.
In particular out of favour are bond proxies and high yielding stocks, because of fear for rising bond yields, and healthcare stocks, since they've been too popular in the past. The most prominent victims, however, are small and mid cap industrial stocks, especially the ones sitting on a healthy gain for the year.
The lure of securing gains made, by selling stock, and a general reluctance to commit to investments outside the mining sector, has effectively created a vacuum in the market where shares can drop in a millisecond, and there are no buyers around to offer natural support.
Last week already I wrote about this, and about how situations like this create cheap entry points for investors who can stomach the short term volatility and uncertainty. It's not every year the US Presidential election offers the real prospect of a Trump victory, but if it does, of course, today's cheap looking share prices can fall a lot deeper, still.
The good news about all this is we shall all know the outcome in the US in a little over one week. The flipside is the Donald can still pull off the unthinkable.
And it's not like that's the only potential risk on the horizon.
Corporate Australia's Growth Diet
For sixteen years I have now been observing and analysing the Australian share market. I don't think I have ever seen the major indices being so less representative of what is actually going on in the market. This month it seems "the market" is noticeably underperforming its peers globally, trading just above its entry level for the calendar year (ex dividends), showing little enthusiasm for much, outside of mining stocks and whatever is the story of the moment on a given day.
Meanwhile, behind the public facade, the sad story that is corporate Australia's vulnerability in the earnings growth department is playing out once again. It didn't seem too bad in August, and there was lots of hope for a "turnaround year", but two months down the track the cracks are showing. If it wasn't for significantly higher bulk commodities prices, we'd be hearing and reading a lot more about the absence of growth for corporate Australia.
Earnings estimates revisions are now firmly in a net negative trend, again, and almost without exception the positive side is being populated by Whitehaven Coal, Rio Tinto, South32, AGL Energy, and the likes. Responsible for the net negative revisions are predominantly industrial companies where profit warnings, festering troubles, underwhelming progress and unexpected disasters are dominating AGMs and market updates.
Blackmores, AMP, Crown Resorts, Healthscope, Wesfarmers, Bega Cheese, Carsales and Ardent Leisure are but few of the names that saw their share price plunge this month, not to mention the many others that were sold down on a guilty-by-association basis.
If anyone's still wondering as to why US indices have been setting new all-time record highs this year, while Australian indices have never even come close to levels of late-2007, therein lies the all-important answer. Corporate Australia is on a growth diet; has been since 2012. It looks like FY17 won't be any different, other than that a massive boost in profits for mining companies is temporarily pushing up the local all-in average. It is this that is being reflected in price action this month, on top of macro discomfort.
Long Term Trend Return
UBS market strategists Dean Dusanic and David Cassidy offered an interesting alternative approach to questions about the Australian share market's valuation and prospects last week with the publication of a longer-term market trend assessment without paying attention to Price-Earnings ratios (or other measurements of valuation) or even growth in profits.
Research by the two has found the real (inflation adjusted) total return of equities in Australia long-term is similar to equities in the USA, approximately 6.35%. But whereas US equities have performed pretty much "on trend", Australian equities (as we all know too well) have not. The implication of this piece of research is that, at some point, the Australian share market return should revert back to trend, and this means relative outperformance, meaning higher returns.
On this basis, Dusanic and Cassidy put the prospective return for Australian equities for the decade ahead on 7.6% per annum with the added observation that buying during times of underperformance historically always has been rewarded in the subsequent period of accelerated returns.
Given the Australian share market only managed to generate minimal returns in recent years, we can all appreciate the accumulated potential inside Australian equities, waiting to be unleashed. There are, however, a few caveats attached to UBS's research. One is that while long term returns have proved remarkably consistent around the 6.35% average per annum (6.34% in Australia), there's no timing mechanism available to predict when exactly such a catch up is likely to occur.
On the other hand, the UBS strategists also concede we don't know whether changes in the macro-landscape might have impacted on the trend going forward. In other words: if it turns out total returns from equities are now permanently lower than in the past, as has been advocated by quite a few experts post 2009 (including UBS, I might add), then future outperformance from Australian equities might occur through lower returns or through a relative larger correction in US markets.
The good news, no doubt, is that returns from US equities have remained on trend up until 2016. I am sure most of us would like to see Australia playing catch up, instead of the other way around.
US Election Outcome Pivotal
This particular piece of UBS research also opens up an interesting question about what label exactly should we use for the Australian share market post 2009? If we take UBS's historical trend line research at face value, then surely periods of sustained above trend returns can be, with everyone's approval, categorised as a "Bull" market. This principle automatically implies that when returns from the Australian share market are below long term trend… well, it definitely no longer deserves to be put in the same basket.
Apart from the occasional outbursts (2009, 2012-13), returns from the Australian share market, as measured through the major indices, has painfully failed to keep pace with the historical long term trend of 6.34% p.a. ex-inflation. But then, we also established a lot more has been happening in Australia than what is showing up in the ASX200, or the All Ordinaries for that matter.
Post 2009, the Australian share market has offered two good years for investors (half of 2012, 2013) versus four not so good years. One observation that divides both scenarios is that in the good years, major indices do not sink below the January entry point during the seasonally weak August-November period. So far this year, this also has not happened. This should provide some comfort.
Let's hope the US electorate doesn't change the script.
Rudi On Tour
I will be presenting:
– Christmas Special for Chatswood members of Australian Investors' Association (AIA), December 14, 7pm
– To Sydney chapter of Australian Shareholders' Association (ASA), December 15, noon-1pm, Sydney Mechanics School of Arts, 280 Pitt Street
– To Perth chapters of Australian Investors' Association (AIA) and Australian Shareholders' Association (ASA) on 7 February 2017
– At the ASA Conference 2017, Grand Hyatt Melbourne, 15-17 May 2017
Nothing Ever Changes, Or Does It?
Yes, of course, investing in the share market is never really different and best working strategies today are the same that worked pre-GFC. Seriously. I tell you, seriously.
Now that we had a good laugh about it, let's get straight to business. This is a low growth environment. Has been since 2010 (it was masked at the time because of the V-shaped recovery from the global recession) and it is not likely to change fundamentally in the near term. I wrote a book about this (see below). This means investment strategies must adapt. You'll be turning your portfolio into a wish list for dinosaurs otherwise (and your returns will be a reflection of it).
Those not afraid to contemplate "this time is different" can subscribe to FNArena and read all about it in our bonus eBooklets 'Make Risk Your Friend' (free with a paid 6 or 12 months subscription) plus the freshly published eBook 'Change. Investing in a low growth world' (equally free with subscription, or available through Amazon and other online distributors).
Here's the link to Amazon: https://goo.gl/XVMzmP
See also further below.
Rudi On TV
– On Tuesday, around 11.15am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
– On Wednesday, I will appear as guest on Sky Business, 12.30-2.30pm
– On Thursday, I will be interviewed on Switzer TV, between 7-8pm
– On Friday, around 11.05am, on Sky Business, I shall make a brief appearance through Skype-link to discuss broker ratings for less than ten minutes
(This story was written on Monday 31th October 2016. It was published on the day in the form of an email to paying subscribers at FNArena).
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.
In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: [email protected] or via Editor Direct on the website).
BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS
Paid subscribers to FNArena receive several bonus publications, at no extra cost, including:
– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow. This book should transform your views and your investment strategies. Can you afford not to read it?
Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup
FNArena has reformatted its monthly price tracker file for All-Weather Performers. Last updated until September 30th but we shall update this week. Paying subscribers can request a copy at [email protected]